Real estate investors and anyone else that keeps up on the economy for that matter must always keep the Federal Reserve Board in the back of their minds. No, the Fed won’t affect your daily routine but the Fed does affect the cost of funds, primarily the Federal Funds rate and the Discount Rate.janet yellen federal reserve

Our friend Ben Bernanke has headed the Federal Reserve since 2006 and re-nominated later by the current administration. Yet he is scheduled to retire from the post at the end of this year, what can we look forward to?

The Federal Funds and Discount Rate are short term, overnight rates charged banks when banks need to borrow money quickly, typically to replenish their reserve requirements. The Fed may increase or decrease each rate at its discretion in an attempt to stimulate or cool down an economy. Sometimes it works, sometimes, well maybe not so much. So who’s the new replacement?

Her name is Janet Yellen, and if confirmed by the Senate will be the first woman head of the Federal Reserve. She will head the entity responsible for keeping interest rates low, high or somewhere in between. Currently, the most effective tool the Federal Reserve has is known as QEII which stands for the second round of quantitative easing. Each month, the Fed buys $85 billion in mortgage backed securities and bonds in an attempt to keep the price high for such securities which in turn keeps interest rates low. Once the program ends, interest rates will move more toward a natural, market driven level. Or at least that’s the theory.

What does Janet Yellen think about QEII? While Bernanke’s philosophy primarily concerns inflation, it is thought that Yellen thinks unemployment is a driver in the economy and is considered a “dove” by Wall Street, meaning she is less likely to increase rates to affect the economy than the other way around.

If she is confirmed, and it appears she will be, the QEII program might last longer than the predecessor would have liked, keeping rates for real estate investors lower, longer.